Post-crisis, is India a loser?

What are the prospects for the world economy once it recovers from the present crisis? And where would India figure in the emerging global scenario?

The OECD has peered into the crystal ball and come out with forecasts right up to 2060 ( Looking to 2060: Long-term global growth prospects). The forecasts indicate that India will be something of a loser in the post-crisis scenario: it will take longer to catch up with the advanced economies than most people had thought earlier. In contrast, the OECD believes China’s surge will continue unabated.

The global boom of the middle of the last decade is unlikely to recur, that is for sure. The OECD sees the world economy returning soon to the average growth rate of the past decade and a half. During 1995-2011, the word economy grew at 3.5% in purchasing-power-parity ( PPP) terms.

The OECD expects it to grow at 3.7% up to 2030. (World GDP is taken as the weightage average sum of GDP for 34 OECD and eight non-OECD countries.) Not bad, considering that 1995-2011 was a period that embraced the east Asian crisis and the Russian default, the internet bubble and the subprime crisis.

You may wonder how the OECD is so optimistic on growth in these bleak times. The eurozone is in recession and not expected to return to modest growth at least for another half a decade. US growth is anaemic five years after the crisis.

It turns out that it is the emerging economies that will power global growth in the years to come, although the group’s growth will slow down from 7% in the recent past to 6% until 2030. In the same period, the OECD group will crawl at 2.2%. So, we will see some partial decoupling of emerging economies’ growth from OECD growth.

There is an important catch to the OECD’s projections. The pattern of savings in the world will be skewed until 2030. India and China will together account for 50% of the global saving by 2030.

This means that global imbalances will begin to widen once the world economy recovers and will reach the pre-crisis (2007) peak by 2025-30. Get set for another first-class global crisis! The OECD thinks greater fiscal consolidation in the developed world is the key to preventing another crisis. Since there is only so much that can be done about fiscal consolidation in the OECD right now, perhaps getting a grip on the banking sector should be the greater priority.

Alright, that is the global outlook. Where does India fit in? Pre-crisis, the present decade was seen as India’s, by the middle of which India’s growth rate was forecast to overtake China’s. The OECD pours cold water on these hopes. It sees China overtaking the US (in PPP terms) by the middle of this decade. India has to wait until 2060 for that feat.

For India, one positive element in the scenario is that during 2030-60, China’s share of world GDP remains at 28%, as adverse demographics drag down its growth rate after 2030. India gains ground in this period, its share of world GDP rising from 11% to 18%. The combined share of India and the US in world GDP in 2030 is about the same as China’s; in 2060, India and the US together overtake China. Thus, the period of China’s dominance of the world economy is 2020-30.

It is worth comparing the OECD’s projections for India with a couple made earlier. In a paper in the Economic and Political Weekly in 2006, former chief economic advisor Arvind Virmani saw China overtaking the US in the middle of this decade as the OECD does. He also saw India overtaking the US by 2037 (not 2060, as the OECD now thinks). Virmani’s projections were also in PPP terms. Putting the OECD and Virmani forecasts together, it seems that, while China’s rise is undisturbed by the crisis, India’s own is set back quite a bit.

Next, consider Goldman Sachs’ revised 2007 Brics report. Goldman’s projections were made using the 2006 market exchange rate with respect to the dollar, not PPP. Goldman Sachs saw India overtaking the US in GDP in 2050 whereas the OECD does not see this happening even in terms of PPP. (Using PPP inflates the Indian GDP, so catch up should be easier).

So, which forecast is right? Goldman assumed a growth rate for Indian GDP of 8.4% during 2007-20, a forecast that has since been overtaken by events. Over the entire period 2006-50, Goldman saw India growing at 6.9%. That would be quite an achievement considering that very few economies have grown at 7% or more for decades together.

Virmani does not state the growth rates assumed. OECD projects real growth rates for India and China at 6.7% and 6.6% respectively for 2011-30. This is the crux of the issue: will India’s average growth rate in the period up to 2030 be below 7% or in the region of 7-8%?

Even in today’s difficult environment, most would settle for the latter. Once the global economy recovers, it is hard to see India’s investment rate of around 35% delivering less than 7% growth. If this is accepted, the OECD will prove wrong. The financial crisis will not have delayed India’s catching up with the advanced world.